Applying Business Strategy Theory in Practice

I’ve just come back from a ski tour in the Silvretta region of the Alps, which spans the border of Austria and Switzerland between the towns of Klosters and Ischgl. Here is the location of the Wiesbadener Hutte in Austria where we stayed on our third night of the tour.

These ski-tours require careful preparation and an experienced guide. At this altitude, over untracked snow, there is a constant risk of avalanches, bad weather or of falling into a crevasse. Any single event, or succession of small mistakes can lead to disaster. Over the past few years I have started to venture off-piste without a guide with a group of friends. Now we are making crucial decisions in a group, such as which route to take, analysing the weather, avalanche risk and other signs.

Heading toward the summit of Piz Buin, having crossed the Silvretta Glacier

My question to you is this: Is a group of off-piste skiers likely to be more or less risk averse than an individual off-piste skier?

To answer this question let’s analyse the dynamics of the group. Are these people natural risk takers or generally risk averse?

Off-piste skiers are risk-takers; some might even consider them adrenalin junkies who get a thrill from being in the danger zone. In this situation the more risk takers there are in a group, the higher the risk threshold of the group. A group of risk takers will be inclined to take more risk.

Now consider a group of accountants or actuaries; would their group decisions become more or less risk averse than as individuals? Accountants are stereotypically risk averse (I acknowledge this is a sweeping statement). If the stereotype holds for this particular group the risk threshold of the group is lowered and they become more risk averse.

This is just one example of “group think” (Janis, 1972) where people may be afraid of introducing conflicting opinions in a group. This is one of the reasons why companies tend form cross-functional teams or may even use personality tests when selecting team members to ensure there is a divergence of opinion.

In our group of off-piste skiers we are aware of this problem of group dynamics and this forms part of our discussions when decision-making. However, I think that the most effective form of risk reduction for our group is the frequent messages and phone-calls from wives/girlfriends throughout our tours telling us to “be careful”.

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“The most useful piece of business advice I have been given is to start planning for my successor on day 1”. These are not my words but those of a CEO interviewed on BBC Radio 4.

Succession planning can be difficult but it is a vital issue for any business. Royal families across the world adopted a simple policy that the first-born son would succeed to the throne. Many family companies still follow a similar policy (Fiat, News Corp etc). This is a nice clear-cut system that everyone understands. Of course, I am not saying that this is necessarily the best system.

Sometimes in a company there is no “heir apparent”. Queen Elizabeth I “the virgin Queen” had no heir and chose not to nominate one for fear that it would diminish her power. The problem is that if no succession planning is apparent people get worried. Remember the falls in Apple’s share price whenever questions were raised about Steve Jobs health?

Elizabeth I of England

Succession planning is not just a case of addressing our own mortality or the chance that we might have an accident; it is true for everyday projects. Management Consultants are often criticized for advising a company for a couple of weeks on a change, making a change and then leaving. Unfortunately, if the right measures are not in place, the changes are less likely to “stick”.

One of the lessons that I, and the team learned in Kenya was to start planning our departure and transmission of roles from day 1. We had left our planning too late and so, on leaving, our Kenyan team were unsure of their roles. Despite our best endeavours our local team was only 90% sure of the procedures and roles that they had to fulfill. Had we started planning from day 1, that 10% confusion might have been avoided.

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Sometimes things really are too good to be true. Often, if the price of something is too low, it is too low for a reason.

Many times while working in investment management my then boss would tell me “it may be a bargain William, but that price is telling you something”. Often he was right; the depressed price was a signal that there was an underlying problem with the company of which we were unaware.

Most recently, this happened to me in Kenya. I was getting stuck into my second week of the CBSM primary school build. We had established a good network of suppliers and barring a few minor problems with undersize foundation stones, things were going well.

Foundation stones being delivered of varying quality

However, money was tight (donations are most welcome by the way) and we were keen to save costs. Interestingly, in Kenya the cost base for a build is inverted to what you would find in Europe. There, labour is cheap and materials are incredibly expensive. For instance, our unskilled labourers were earning 250KSH per day –roughly €2.50 a day. A bag of concrete costs in the region of KSH800 or €8.00.

The foundations require vast quantities of aggregate (stone chips) and these arrived at site in 30 tonne loads. Initially, we had negotiated a price of KSH2,500 per tonne with our supplier Joseph, he always delivered on time, kept us in touch if there was a problem, and the goods were always to the right quality. By this time however, the build was attracting lots of local (unwanted) interest. People in shirts (as opposed to t-shirts) were turning up to the site. An unusual spectacle in this poor area, these turned out to be local suppliers who brazenly informed me that it was my “duty” to give them some business as it was a “community project”. I was reluctant to change suppliers as we had already established a simple functioning supply chain, with good stock control and I didn’t like their attitude. However, I am always interested to know the market price for goods so I asked for quotes for aggregate from two of the “shirts”. Kebaba bid KSH2,300 per tonne and Joshua bid KSH2,400.

Chatting to Masika the construction manager (white shirt) while a local supplier looks on

At first glance, here was a considerable saving to be made. Potentially we could save KSH6,000 per load. I was still unwilling to change suppliers. Besides, the local Kenyan team didn’t know these two locals. I decided to have a meeting with our trusted existing supplier Joseph. I decided to adopt an open book policy and presented him with the two quotes and asked if him for his thoughts. He looked at the paper, paused for a while and then reduced his price by KSH100 per tonne. He complained that the lowest bid was too low, there was simply no profit in that deal for the supplier after transport and other costs were added. Now, better understanding his supply chain, I could make a balanced decision. I therefore accepted Joseph’s bid of KSH2,400 told the other suppliers that our books were closed and asked them to leave the site.

Part of the CBSM build supply chain

The next day there was an uproar! Whilst I was procuring steel from Bungoma, the police had arrived and finding Kebaba (the low bidder) at the gates to the site, arrested him. Allegedly, he had been stealing aggregate (diverting lorries) from a government site. Had we taken Kebaba’s offer, there could have been serious repercussions not only for the build but also for the charity.

When dealing with suppliers it is important to understand their costs and know their business. Japanese companies such as Toyota are well known for taking a long-term view on business relationships and for the high transparency of the bidding process. For instance they often build-in an accepted profit margin into a deal. Moreover, if they then ask for further cost savings they will work with the supplier to ensure that these can be met and not at a price which damages the long term future of the supplier. After all, we want to ensure that suppliers can deliver in the long-term on cost, quality, time and also invest in their businesses. Ultimately this will be to our benefit too. The diagram below shows an “open book” 2 way communication strategy which can be used when dealing with suppliers as suggested by Lamming (1996).

2 way flow of information between supplier and purchaser

Sako (1992) in his analysis of UK and Japanese firms found that 3 types of trust are needed for good buyer-supplier relationships:

1. Contractual trust – the adherence to formal, legal promises
2. Competence trust – that either side is capable of delivering what has been prominsed.
3. Goodwill trust – which borders on “ethics”, trusting that appropriate behaviour will ensue.

Joseph is such a supplier. He delivers on time, on cost and to the required quality. I trust him and we communicate well; both giving and receiving information on the build. I also noticed that his trucks were in good condition and his employees were well looked after. Here is a man who is building his company for the future. Hopefully next time I receive a low bid from a supplier it will act as a warning light and I will be on my guard. In finance we have a term “KYC” for Know Your Customer, I think my experience in Kenya has taught me that the acronym “KYS” Know Your Supplier is equally valid.

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I’ve just returned from Kenya. Hopefully, I’ve successfully defeated the flourishing Amoebas in my intestine. I thought you might like to hear about my recent experience with the anchoring heuristic whilst building a primary school for the children’s charity CBSM Kimilili, in western Kenya.

Some of the 250+ pupils at CBSM School Kimilili enjoying lunch

I find it both exciting and challenging working with cultures different to my own but often such differences can lead to mistakes being made; for instance our lack of knowledge of the environment means that we are working with incomplete information. In such situations we are likely to draw on our previous experience, which may have little bearing or relevance to the current problem. These subjective judgements are called heuristics.

Heuristics are “a method of solving problems by finding practical ways of dealing with them, learning from past experience” (Oxford Advanced Learner’s Dictionary). Heuristics are often good; they help us make decisions quicker. However, by being aware of when we may be using them we can hopefully make better, more balanced decisions.One such heuristic is the “anchoring and adjustment” heuristic. Research has found that individuals tend to anchor their subsequent answers around a given starting point (Johnson, 2011).

Let’s take a look at buying cement, an expensive commodity in any country. On the school build we needed to purchase and have delivered 150 bags of 32.5N Bamburi cement for blinding the foundations. Lacking transport, we had to source the cement from hardware shops in town rather than buy from the wholesalers in Bungoma. I was sincerely advised at this point that I would be subject to the Mzungo (white man) effect and it would be impossible for me to get a fair price.

Mixing the cement and aggregate used in the blinding

Loving a challenge, I suggested that Masika, the construction manager and I work separately; we would each take a different side of the town, meet in the middle and the winner with the lowest price would win of a bottle of (cold!) Tusker beer. Well, I won the beer, having found a price of 5KSH lower than Masika!

Masika the Construction Manager, Agnes Kuhne and Dominik Klimmek at site

It was during the cement negotiations that I realised I had succumbed to the anchoring heuristic. We roughly knew the price of cement direct from the factory; add on a margin for the wholesalers and then for the retailers and we therefore assumed that the very best price (BATNA) might be KSH850.

Checking the quality of the cement before accepting the delivery

Sure enough, each hardware shop was quoting around the KSH860/870 mark, give or take KSH10. I therefore based my negotiations around this figure. That was until I came to Highway Hardware towards the end of Kimilili’s main street. Here, the owner opened the bidding with a price of KSH835 for the 100 bags! I realised my mistake that I’d been anchoring my bids at the KSH850 level. Now my negotiations would start from this lower price. In the end, I managed to knock a further KSH5 off the price and settle at KSH830 for 150 bags including delivery.

The 150 bags of cement arrive at the school

I think this experience is a good example of the anchoring heuristic; it also shows us that the colour of our skin doesn’t necessarily mean we can’t get the best price.

First price anchored at the higher level, Highway price much, much lower.

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My editor has a complaint. “William! So far all your articles seem to be about change being a good thing. Perhaps try and give a more balanced view and show examples of when change hasn’t worked”.

It is always good to get feedback even if it isn’t necessarily what you want to hear. My editor makes a good point. I have written a fair amount about the benefits of change and it is true change isn’t necessarily good.

I therefore considered this constructive criticism on my morning walk along the banks of lake Zurich before settling down once again to my MBA dissertation. I didn’t come up with a suitable example for the blog of change being bad. Of course there are lots of examples of change being bad in everyday life, but I couldn’t think of a nice, personal, interesting example.

My morning walk along the shore of Lake Zurich

My friend and former colleague Rob was arriving from Milan that evening. I decided to ask him. Over a beer, while waiting for the Yorkshire pudding to rise we discussed when, in our former workplace, change had been bad. After racking our brains for an hour we still hadn’t come up with a good example. Exasperated Rob said, “we didn’t change anything that didn’t need fixing; the changes we made were necessary”. He’s right; in the words of an old English saying “if it ain’t broke, don’t fix it”.

Change usually has a cost but it is the human element too that is usually most problematic and often overlooked. Change is generally traumatic for people. I admit I’m unusual, I find it exciting but for the majority of people, this isn’t the case. Change needs to be carefully managed and only carried out when the advantages outweigh the disadvantages. I hope you find this graphic detailing the transition cycle useful for better understanding how people react to change.

This is a slightly more complex graph than the negative response to change graphic that I published earlier in the year. Here we see the various personal outcomes of change and just how traumatic it can be –sometimes people don’t recover and end up leaving the company.

Note: The transition cycle – a template for human response to change (Williams, 1999) reprinted from Dr Edgar Mayer’s MBA lecture on Change Management at the University of Southampton, UK 05/05/2011.

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I’m new to blogging and it was taking me ages to understand how to set-up my blog, get the layout right and generally get started. I’m a great believer that if you don’t know the answer to a question, ask an expert. Social media makes it easy to find experts particularly with regards to social media; to find some helpers I posted the Zurich Bloggers Event on Glocals (a swiss regional networking site) and put a message out on my Twitter account. Result: 10 experts came along ready to help and share their ideas!

I set-up a Zurich Bloggers Forum to help answer my own questions but also to help others with their blogs, get feedback or even to start blogging. Our first meeting a few weeks ago drew a lively crowd of people with great blogs on varied subjects. We had everything from Lucille’s blog on beautiful Zurich fountains to Laura’s creative blog which she describes as “a comfortable corner of my mind open to the public”.

One of the first topics we chatted about was SEO or Search Engine Optimization. This is basically about helping people to find your blog more easily. By making a few easy changes, you can make your blog more visible and readable to search engines. There are lots of simple steps such as making sure that your title matches your content and try and use these same words in the content of your blog post (hint! look at the number of times I’ve used the word Zurich, Bloggers, Blogs).

A second tip was to register your blog with blog directories such as Technorati.com this will help with your Search Engine Optimization and our forum members report that it does work.

I’ve just spent the last few minutes registering my blog on this site. I now have to insert this code 68UE3Y77UUWF into my blog. Done! And registration will be complete.

For further information on blogging, writing and meeting people with ideas, come along to our Zurich Bloggers Forum, 20.00 Tuesday, 22/11/2011, Starbucks, Bellevue. See you there!

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On social media platforms 90% of people are lurkers, 9% are commenters and just 1% are creators (Nielsen, 2006). This is a widely used rule in social media. Pretty amazing isn’t it? However, when you start to think about it, it sort of makes sense. Take a look at your Facebook posts; see how many of your friends have commented on a post and then using this rule you can get an idea of how many have actually looked at this post.

This tells us something about the human spirit. Most of us are lurkers; checking our friends’ photos and comments but only responding some of the time. In general, we are quite happy to sit back passively on the sidelines. Sometimes though, those lurkers and commenters can be galvanised behind a cause to become active participants too.

90:9:1 Social Media Engagement Rule (adapted from Nielsen [2006])

“All dreams can come true, if you have the courage to pursue them…”

Away from Facebook, consider the wider implications of the social media rule for gathering support. Let’s take a look at a children’s charity called CBSM Kimilili in Kenya. One year ago, two young women travelled to the small town of Kimilili in western Kenya to teach at the local school. On their arrival, Agnes Kuehne and Alexandra Frick were shocked to see that the site had no toilets, no water, and a single classroom for all age groups.

CBSM Kimilili Agnes Kuehne with pupils Ima and Brilliant

However, by the end of the 4th week these two had, with donations from friends across the world, bought the land for the school, galvanised the community into building 3 additional classrooms, built a loo block, provided water access, fenced the perimeter, provided books, some uniforms for students, interviewed, employed, and salaried 2 teachers. Their website states “All dreams can come true, if you have the courage to pursue them…”

CBSM Kimilili pupils at break time

Blogging: Alex & Agnes tell CBSM Kimilili’s story to the world

CBSM Kimilili relies on donations for its continued existence supporting the development of the youngsters in its care. During their stay, Alex and Agnes blogged each day telling the world about the little school, its wonderful pupils and inspiring staff. From an anonymous start, word spread virally on the Internet about this remarkable story. During their stay the blog was receiving over 200 hits per day. Through social media new friends and supporters were made and old acquaintances got in touch. A friend of Agnes by chance stumbled across the blog and inspired by what he saw freely gave his time to design their homepage. Since July it has received over 9,500 hits. CBSM Kimilili’s social media usage of Facebook, blogging platform and website are the lifelines for continued funding and development of the school. It is those 90% lurkers and 9% commenters who, inspired by Alex and Agnes’ creative efforts are no longer passive but are actively helping provide schooling and support to the children of Kimilili, Kenya.

Alex Frick with CBSM Kimilili teacher Calvin

How will you galvanise your lurkers to become active participants?

In order to help your business, the question you should ask yourself is; how can you galvanise your lurkers? If you get it right, the rewards are great; these people can become active supporters of your business. To give you some ideas you may want to check out the blog and homepage of Kimilili – you may even find yourself contributing.